FINA TRUST MFB. Nigeria / June Stable. MICROFINANCE INSTITUTIONAL RATING ANALYST

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1 MICROFINANCE INSTITUTIONAL RATING FINA TRUST MFB Nigeria / June 2016 RATING GRADE PERSPECTIVE Stable ANALYST Maritza Rodriguez maritza@microrate.com Info@microrate.com

2 CONTENT Microfinance Environment 5 Governance and Management 6 Organization 7 Credit Operations 8 Porfolio Quality 9 Financial Profile

3 FINA TRUST MFB RATING GRADE PERSPECTIVE 1 Number of ratings Rating Validity date 2 Financial Profile 3 Date of Visit Date of Financial Information Stable MICROFINANCE INSTITUTIONAL RATINGS FINATRUST MAIN PERFORMANCE INDICATORS Gross Loan Portfolio (US$000) 1 June-17 May- 16 Dec- 15 Dec-13 Dec-14 Dec-15 $3,745 $3,261 $4,037 Number of Borrowers n/a 345 5,210 Total savings (US$000) $4,548 $5,063 $3,864 Number of Savers 883 1,229 9,402 Average loan n/a $9,453 $775 Portfolio at Risk n/a 6.4% 7.5% Write-offs 0.0% 0.0% 0.0% Leverage ROE* 8.8% 2.2% -4.9% * Adjusted a FINA TRUST MFB is a for-profit, regulated microfinance institution (MFI). It began operations in 2009 and currently operates under a state license in Lagos with 3 offices. As of December 2015, FINA TRUST had 5,210 active borrowers with an outstanding portfolio of US$ 4 million. The bank originally offered Small and Medium Enterprise (SME) Loans with individual methodology. In 2015 the institution focused strongly on village banking methodology, changing drastically the average loan size and increasing substantially the number of borrowers. Deposits from the public total US$3.9 million. RATING RATIONALE FINA TRUST MFB is growing rapidly with excellent governance, but in need of more specialization in microfinance operations. It has a clear strategy of moving from Small Business lending to microfinance. The diverse products and credit methodology create a path to serve the clients while growing their businesses. The methodology for Small and Medium (SME) loans is well adapted to the context. However, the microcredit (individual and group lending), is still overly complex for this market segment. It creates high Operating Expenses and is likely to result in high arrears. To achieve healthy growth, the organization needs to strengthen staff at all levels with more specialization in microcredit. Otherwise ambitious growth could jeopardize the Bank s financial results. Financially, FINA TRUST MFB s solvency, liquidity and market risk management are good to excellent. Apart from equity, savings mobilization is the single-most important source of funding, however concentration in a few big savers poses a moderate risk. Profitability is tight and could become tighter if the Bank cannot reduce relatively high operating expenses. Ambitious growth of the microcredit portfolio could threaten profitability further unless weaknesses in staff training and lending methodology are dealt with first. HIGHLIGHTS Strengths» Excellent governance» Diversity of credit and savings products» Strong share of deposits Risk Factors» Cumbersome methodology for microloans» Need of improving staff training and knowledge in microcredit» Tight profitability 1 See Annex I. 2 The rating is valid up to one year after the issue of the draft report. MicroRate reserves the right to modify the rating at any time due to changes that may occur. 3 See Annex

4 GENERAL SUMMARY FINA TRUST MFB MicroRate- Nigerian MFIs Indicators Dec-15 Quartile* 1st Quartile Average Adjusted ROE -4.9% 4to 35.4% 39.8% Leverage 4.2 4to Portfolio at Risk 7.5% 3ero 0.5% 1.3% Operating Expense Ratio 32.1% 4to 21.5% 26.5% Number of borrowers per staff 57 4to Operating Margin 3.0% 2do 13.4% 10.8% Dec-15 Average Gross Loan Portfolio (US$000) Number of Borrowers Average Loan Balance (per borrower) $4,037 5,210 $775 $70, ,434 $351 * The quartiles given show which quartile the MFI is in for a particular indicator. US$000 % $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Dec-14 Dec % 7.6% 7.4% 7.2% 7.0% 6.8% 6.6% 6.4% 6.2% 6.0% 5.8% 5.6% Gross Loan Portfolio (US$000) Portfolio at Risk FINA TRUST MFB Nigeria» Portfolio (US$000): US$4,037» Borrowers: 5,210» Number of offices: 3» Number of states served in the country: 1 out of 36.» Credit Methodology: Individual and village banking» Number of financial products: 6 4

5 MICROFINANCE ENVIRONMENT AND POSITIONING Country Profile Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Annual Inflation 10.3% 12.0% 7.9% 7.9% 9.6% Annual Devaluation 5.0% -0.6% 0.0% 7.9% 16.1% End of Period Official Exchange Rate / US$ Deposit Rate (Year Average) 6.8% 9.2% 8.0% 9.5% 6.9% GDP Annual Nominal Growth 4.9% 4.3% 5.4% 6.3% 3.0% Source: International Finance Statistics Unless Noted Differently» Huge potential market» Microfinance regulation and supervision are strengthening, but remain insufficient» No developed credit bureaus for the microfinance sector» Strong positioning of FINA TRUST in SME and entering the microcredit niche with challenges Nigeria is considered a lower-middle income country. The economy relies mainly on oil exports that provide 80% of the country s export revenue. The low price of oil has affected the economy. Inflation and accelerating devaluation are challenges. Nigeria has the world's seventh-largest natural gas reserves but mismanagement, corruption, and political problems significantly slow the country's development. Instability is an issue in the country, especially in the north where religious conflicts lead to frequent breakdowns in law and order and have spawned the Boko Haram insurgency. However, FINA TRUST does not operate in any of the affected areas. In May 2015, a new President was elected on a platform of fighting corruption and increasing economic inclusion. The dramatic decline in oil prices however, is cutting tax revenue and thereby limits the scope of government action. One symptom of the oil price decline is a growing shortage of dollars, which is leading to restrictions on foreign currency transfers. The financial sector is still underdeveloped. Only 36% of the adult population is banked 4. It suggests that there are opportunities to extend financial services to the unbanked and under-banked low income segments in the country. There is still huge unmet demand in the microfinance sector of Nigeria. The sector is dominated by a few large NGOs and Microfinance banks. The sector is mostly financed by international investors. (i) Unit MFBs which can operate branches in one unique location of a state, (ii) State MFBs, in all parts of one State; (iii) National MFBs authorized to operate in all 36 States. Supervisory bodies are still understaffed to effectively supervise the large number of MFBs (nearly 900) and MFIs. There are three Nigerian credit bureaus, but they still have challenges to develop microfinance data. Over-indebtedness is not yet an important issue in Nigeria, but increasing. FINA TRUST is a small scale player in Lagos, but has a diversified offer covering different niches (SME and microcredit). Traditionally, its main focus was on the small and medium enterprise (SME) market. This niche is underserved by traditional Banks and it is not served by MFIs. In this context, FINA TRUST is well positioned, providing faster service than its competitors. Since 2015, FINA TRUST has increasingly focused on providing group-lending microcredit within its product mix. This lower niche of the microcredit market in Nigeria is vast and still largely underserved. While FINA TRUST has a clear vision to reach it, the established microfinance institutions, that have more specialized group lending methodologies, will be strong competitors in this niche. A relatively cumbersome credit methodology, stricter credit conditions and higher financial and operating expenses of FINA TRUST are likely to affect the competition with the big MFIs. On the other hand, FINA TRUST has an important portfolio with individual microcredit methodology. This offers a huge opportunity, since the niche of group lending is maturing and the large established competitors are not serving it yet. In general, to be competitive FINA TRUST needs a more specialized microloans methodology. On the other hand, savings mobilization, which accounts for 80% of funding provides competitive advantage. The microfinance regulatory environment was adjusted in April 2011, defining three categories of microfinance banks: 4 Enhancing Financial Innovation and Access to Financial Services in Nigeria 2014 survey. 5

6 GOVERNANCE AND MANAGEMENT» Excellent governance» Clear strategy of moving to microcredit» Experienced top management, but in need of more microcredit specialization FINA TRUST began operations in late It has a state (as opposed to a national) license to operate as a microfinance bank. Its vision aims to serve the microfinance sector on a long-term basis. The MFB is completely owned by Nigerian shareholders, four of whom are members of the board. Three of the board members are independent, which follows best practices of governance. Shareholders Structure Shareholders Participation Investor % Stecam Nigeria Ltd Engineering 25.0% Other 3 investors 10.0% Total 100.0% Board members are Nigerian professionals with significant board experience. Their backgrounds range from business and banking to engineering. There is still a lack of microfinance background, but this is offset by a strong culture of learning. So far, all earnings were retained in the company. No decision has been made for the period The board meets quarterly but calls additional meetings as needed and it receives frequently information about the bank s performance. The board is well structured and good rules exist to ensure checks and balances and to avoid conflicts of interest. There are four board sub committees, one of them Internal Audit. Additionally, the board gets information from the Risk Department about overall risks. The President of the board is an experienced accountant with high reputation in the country. A board member himself, the Managing Director is an experienced banking professional. He is the main shareholder and he is supported by a stable and committed top management team. All of them are experienced professionals within their field. However, more specialization in microcredit is needed, in order to face the challenges of the context and to improve the credit methodology. The business plan is consistent. They expect to open two branches yearly until 2020, mainly in areas with low competition. Priority is given to human resource management and technology to provide a solid foundation for institutional growth. Specifically, the bank intends to be one of the top 3 in staff compensation in the microfinance industry Vision To be the leading Microfinance Bank in Nigeria. Mission To Set new standard in Microfinance Banking by improving economically active individual and entrepreneur through excellence services and innovative product delivered by skilled workforce. The board members are willing to increase the equity in the next 5 years. The institution is successfully mobilizing deposits and now they need to start building relationships with international investors in order to diversify funding and to further reduce financial expenses. Initially, FINA TRUST was focused on traditional individual lending for SMEs. However since late 2014, priority has shifted towards group lending to microentrepreneurs, which is more consistent with the company s mission and vision. The bank aims to gain a 30-40% share of microloans in the total portfolio. In MicroRate s opinion the institution needs to strengthen its credit methodology and to better train staff before growing more in that niche. Without a strengthened methodology and well-trained staff, the quality of the microcredit portfolio could deteriorate rapidly. 6

7 ORGANIZATION» Stable staff, but more training is needed» Low efficiency and productivity» Solid structure of internal control, but not yet efficient» Acceptable information system FINA TRUST is a young institution, with stable staff. The internal control is heavy and the information system is acceptable. The bank has the practice of recruiting experienced staff from banks and microfinance institutions. This creates a risk of weak immersion in the culture of the institution. The initial training for Loan Officers is too short (2 weeks) and supervision is not efficient. Organizational Profile Internal and external training are planned annually. However, more training and close supervision is needed to strengthen the staff in branches. The bank has not yet reached a sufficiently high level of standardization of credit operations and internal controls are too weak to control this problem. Efficiency and Productivity Dec-13 Dec-14 Dec-15 Number of branches Total Staff Number of loan officers Staff turnover n/a n/a n/a Operating Expense / Average Gross Portfolio Dec-13 Dec-14 Dec-15 MicroRate Nigeria 33.1% 29.5% 32.1% 26.5% Borrowers/ Staff n/a The operating efficiency is low. The Operating Expense ratio is high in comparison with Nigerian MFIs. Some factors that affect this ratio are the small scale, low productivity and the expenses of taking deposits. However, in MicroRate s opinion the main factor is the heavy methodology and cumbersome internal controls. These inefficiencies limit the capacity to compete with big MFIs. The staff productivity is affected negatively by the policy of forming small groups for the village banking product. FINA TRUST requires from 5 to 10 members whereas leading MFIs require from 10 to 30 members. The MFI motivates staff with monthly, quarterly and annually bonuses. These take into account qualitative and quantitative factors. However, the monthly bonus does not follow best practices to combine the portfolio growth and portfolio quality. This may affect negatively the bank indicators. Internal Control FINA TRUST has a solid structure of internal control but it is too heavy for a MFI. As an example, 100% of group lending clients are visited by the Loan Officer, Supervisor and Verification Officer. The internal audit s reports show good knowledge of the microfinance sector. A new Manager is trying to re-organize the team s tasks. Internal auditors do mostly deskwork and the supervisors are not monitored by them in the field. This affects the standardization of the group methodology and weakens the internal controls. FINA TRUST has a risk department, which is not commonly seen in small MFIs. This department is in charge of evaluating 100% of the loans. This centralization may not work while growing the portfolio and adds expenses which are too high for microloans. This office also evaluates the overall risks of the institution using a simple system. Information System The institution has an acceptable information system required to manage the current operations. It includes most of the banking operations and is flexible to create new products. However, MicroRate observed that there is need for the bank to adequately equip the staff with important information on portfolio and portfolio quality and other aspects of the bank s business. The system BANK ONE is provided by a foreign company since It is used by approximately 100 MFB in Nigeria. It is a web-based banking application with backups in the cloud. FINA TRUST is actively looking for electronic solutions and is convinced that the technology has to support the bank s operations. For example a phone application allows clients to make several operations online. Additionally, the bank works with Mastercard debit cards. Both achievements are commendable, considering the small scale of the bank. 7

8 CREDIT OPERATIONS Company Profile Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Gross Loan Portfolio (US$000) $2,385 $2,774 $3,745 $3,261 $4,037 Annual Change in Gross Loans 193.2% 16.3% 35.0% -12.9% 23.8% Number of Borrowers n/a n/a n/a 345 5,210 Annual Change in Number of Borrowers n/a n/a n/a n/a % Number of Loans Outstanding n/a n/a n/a 345 5,210 Total savings (US$000) $2,423 $3,183 $4,548 $5,063 $3,864 Annual Change in savings n/a 31.4% 42.9% 11.3% -23.7% Average Loan Balance (per borrower)- US$ n/a n/a n/a $9,453 $775 Portfolio at Risk / Gross Loan Portfolio n/a n/a n/a 6.4% 7.5% Portfolio Yield 73.3% 55.5% 54.1% 48.5% 47.5%» Important level of growth» Diversification by amounts and products» Heavy microcredit methodology» Moderate portfolio quality with negative trend» Relatively low provisions coverage In a strategic shift, FINA TRUST dramatically changed the portfolio composition in After focusing exclusively on SME in the past, the institution introduced a village banking product in In only one year, average loan size decreased from US$ 9,453 to US $775 and the number of borrowers rose from 345 to 5,210. All loans continue to be very short term with an average maturity of 3 months. As a result, the portfolio grew by 24% in US$ terms and by 44% in local currency 5. SME loans still account for nearly 70% of the outstanding loan portfolio, but at the end of 2015, 94% of borrowers were microentrepreneurs. Graph 1: Portfolio Growth in Local Currency and Foreign Currency In MicroRate s experience, the transition from small-business lending to microcredit tends to be difficult for financial institutions. This is particularly the case if this transition has occurred abruptly, as in FINA TRUST. It is then no surprise that the institution still struggles to find a firm footing in microlending. Despite considerable attention to staff training, more needs to be done to give loan officers a sufficiently firm grounding in the microcredit methodology. Product Mix as of December 2015 Product Small Business Loans Village Banking Loans Microloans to individuals Portfolio Clients Average loan Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Dec % 69.2% 45.8% 3.0% $15,405 $18, % 16.3% 18.6% 93.7% $706 $ % 13.7% 26.7% 2.4% $7,896 $4,396 Consumer Loans 0.9% 0.2% 1.4% 0.1% $5,667 $1,527 Other Loans 1.6% 0.6% 7.5% 0.8% $2,070 $610 Total 100% 100% 100% 100% $9,530 $775 50% 40% 30% 20% 10% 0% -10% -20% 43.7% 35.0% 35.0% 23.8% 15.6% 16.3% -6.0% -12.9% Dec-12 Dec-13 Dec-14 Dec-15 Local Currency Foreign Currency Loan officers are specialized by credit product. SME loans, FINA TRUST s traditional product, show good methodology in terms of qualitative factors. However, cash analysis could be improved. For microloans to individuals, the bank applies the same methodology as for SME loans. This is inefficient and wherever MicroRate has seen it applied it produces poor results. Microentrepreneurs usually cannot comply with banking formalities and in any event the cost of doing so would be disproportionally high for loans of such a small size. 5 The US$ numbers for 2015 are somewhat distorted by the rapid devaluation of the Naira (16%). Important inconsistencies in the cash analysis confirm that the approval process for individual loans in general, is not efficient. Best practices suggest having participatory credit 8

9 committees (with loan officers present). Leading MFIs show that participatory credit committees are the best way to learn for the credit staff. In general, for individual methodology, as in its small business lending, the bank is relying strongly on collateral (cash, two guarantors, signed checks from clients and guarantors; assets, mortgages, etc). As loan sizes decreases, formal collateral tends to be more cumbersome to administer and less effective. The key to good results in individual microcredit is an effective cash flow analysis that accurately measures the borrowers repayment capacity. FINA TRUST needs to redouble its efforts to teach loan officers how to master this skill. It is good to see that individual loans smaller than US$ (called micro-individual) have an acceptably defined methodology. However, the methodology is not well implemented by the loan officers nor is it well checked during loan approval. Most of the growth has occurred in the group-lending portfolio (with village banking methodology) and the MFI expects this growth to accelerate further. The groups are formed by 5-10 members. Leading MFIs using village banking methodology find that larger groups (up to 30 members) allow the same number of loan officers to attend to two or three times the number of clients and that they are more effective. MicroRate also observed various breaches of best village banking practice. Closer supervision of all lending practices and improved and more intensive pre-loan training would remedy these weaknesses. FINA TRUST s group lending methodology makes sure that information is reliable by visiting all the homes and businesses of all village banking clients. This is another case where a practice that is standard in SME lending is overly cumbersome and certainly too expensive to be applied in microcredit. Best practice in microcredit suggests to visit a random sample of clients. Group Lending US$ 250 APR* EIR** Interest 72.4% 105.2% Fees 23.6% 53.5% Mandatory Savings 25.3% 72.8% Total 121.3% 231.5% * Annual Percentage Rate. ** Effective Interest Rate. It is an interest rate with an annual compound interest. Both include interest, fees and savings. Cash collateral for group lending (10% up front and approximately US$ 1 weekly) is higher than is usual in the Nigerian market and it is used as group liability. Big Nigerian competitors use it as personal liability. Since the market is used to it for many years, it can affect negatively the competition. Furthermore, savings are deposited in an account that is owned jointly by all group, which can become a high reputational risk. FINA TRUST has achieved moderate compliance of Client Protection Principles. The transparency, privacy of client data, the risk of over indebtedness and respectful treatment of clients are well managed. However, the effective cost of borrowing from FINA TRUST is high. High cash collateral requirements (20%) contribute to this cost. In a market where demand for credit far exceeds supply these practices merely slow down growth. But if competition from other MFIs accelerates as it is bound to FINA TRUST could find itself at a serious disadvantage if it has not by then managed to bring its costs and the prices it charges down to competitive levels. Finally, there is opportunity to implement a complaint resolution system. Those challenges are understandable for a small MFI. Client Protection Principles Appropiate product design and delivery Prevention of over-indebtedness. Transparency Responsible pricing Fair and respectful treatment of clients. Privacy of client data Mechanisms for complaint resolution Portfolio Quality FINA TRUST shows moderate portfolio quality with relatively low (for a microfinance institution) provision coverage. However, there are early signs that weaknesses in the microcredit methodology are beginning to affect portfolio quality. Portfolio Quality Portfolio at Risk / Gross Loan Portfolio Write-offs / Gross loan portfolio Loan loss reserves / Portfolio at Risk Dec-15 Good Good Good Poor Good Good Fair Dec-13 Dec-14 Dec-15 MicroRate Nigeria n/a 6.4% 7.5% 1.3% 0.0% 0.0% 0.0% 2.1% n/a 107.8% 70.3% 156.8% *Balance of Loans w ith arrears >30 days plus refinanced loans. Because the MFI does not have the practice of writing off loans, the PAR is affected by old loans with more than 180 days (87% of the PAR30). If those loans were written off, PAR30 would be 1%. 6 Included in the group lending portfolio. No break down exists. 9

10 PAR by Products Product PAR by Products Weight in PAR Dec-14 Dec-15 Dec-14 Dec-15 Small Business Loans 5.3% 4.9% 62.7% 45.1% Village Banking Loans** 0.0% 1.7% 0.0% 3.7% Microloans to individuals 9.3% 23.8% 32.5% 43.3% Consumer Loans 7.4% 22.6% 1.0% 0.5% Other Loans 14.8% 86.8% 3.8% 7.5% Total 6.3% 7.5% 100% 100% *Balance of Loans with arrears >30 days plus refinanced loans. ** Measured at the group level, not at the level of the individual group member. The portfolio at risk of group lending of 1.7%, at first sight seems good, since the expected average in the sector is 3%. However, the institution is measuring arrears only at the group level. This figure will not show arrears by individual group members, which have been covered by the group or by the bank paying itself from the Group s savings account. Measuring arrears at the level of group members would help the institution to evaluate the risk of deterioration of this product. Yet the aging portfolio analysis suggests that the group savings are being used to offset loans from defaulters. Best practices suggest using the cash collateral only at the end of the cycle and only after all other ways of collecting arrears have been exhausted. The large difference between PAR of 30 days or less (12%) and loans affected by arrears of more than 30 days (1.7%) suggests that group members have to make considerable sacrifices to cover arrears of their delinquent colleagues before these exceed 30 days. The 12% arrears level is significant, because it means that up to 4 repayments have been missed before the delinquent amount was somehow covered by the village bank before it reached the 30-day mark. Also, relying heavily on other group members and on their savings undermines the village banking methodology as creditworthy members begin to leave. In that sense a large difference between a high PAR of less than 30 days and low PAR above 30 days is a leading indicator of portfolio trouble to come. The provisions coverage of PAR30 was reduced in The PAR increased more than the provision expenses of the period. The coverage seems relatively low for a MFI. However, since the SME loans are well secured with formal collateral a lower level of provision coverage is acceptable. Loans are not restructured. Collection procedures are in line with best practices, which includes calls before the due date. However, the credit staff don t have up-to-date portfolio information at hand. It may suggest that the collection is not strong and timely as expected. It can affect the image of the institution and position it a soft collector. 10

11 FINANCIAL PROFILE Financial Ratios Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Capital Adequacy Debt / Equity Asset Quality Portfolio at Risk / Gross Loan Portfolio n/a n/a n/a 6.4% 7.5% Write-offs / Gross loan portfolio 0.0% 0.0% 0.0% 0.0% 0.0% Loan loss reserves / Portfolio at Risk n/a n/a n/a 107.8% 70.3% Loan loss provision exp 4.1% 0.7% 3.7% 3.0% 0.6% Management Operating Expense Ratio 47.2% 40.9% 33.1% 29.5% 32.1% Earnings Net income / Average equity 14.7% 11.5% 14.9% 8.3% 13.0% Net income / Average assets 2.1% 1.5% 1.9% 1.1% 1.9% Portfolio Yield 73.3% 55.5% 54.1% 48.5% 47.5% Cost of borrowed funds 12.4% 9.6% 10.2% 9.9% 9.6% Liquidity (Cash & Banks + Temp Inv) / Gross Loans 19.1% 43.9% 58.0% 84.4% 31.9% (Cash & Banks + Temp Inv) / Deposits 18.8% 38.2% 47.8% 54.3% 33.3%» Good solvency» Well managed liquidity and no market risk» Strong participation of savings» Tight profitability FINA TRUST has a good financial profile. However, the tight profitability is the main concern. The traditional niche (SME) prioritizes the speed of the service and hence it allows high prices, which in turn lead to a high portfolio yield. However, portfolio yield is decreasing faster than expenses. The increasing portfolio at risk is affecting negatively this indicator, since the loans in arrears do not generate income. In 2015, the group lending started to grow. This product has lower interest rates than other products of FINA TRUST, in order to compete with huge MFIs. FINA TRUST does not calculate profitability by product, but given the relatively heavy and therefore expensive microcredit methodology it is likely that this new product exercises a drag on profitability. If this is indeed the case it would be prudent for the bank to slow down growth of this segment of the portfolio until methodology problems are ironed out and operating expenses have been reduced. Otherwise growing the microcredit portfolio would increase the pressure on margins. As a young institution, financial expenses are high as well because the bank needs to offer depositors higher interest rates than established banks, which is understandable. Operating Margin Composition Dec-13 Dec-14 Dec-15 MicroRate Nigeria Portfolio Yield 54.1% 48.5% 47.5% 47.2% Interest expense 12.2% 13.6% 11.8% 8.3% Financial margin 41.9% 34.8% 35.7% 38.9% Operating Expense Ratio 33.1% 29.5% 32.1% 26.5% Loan loss provision exp 3.7% 3.0% 0.6% 1.6% Net operating margin 5.1% 2.4% 3.0% 10.8% Adjusted ROE 8.8% 2.2% -4.9% 39.8% In order to reduce financial expenses, in 2015, the bank reduced the interest rates for fixed deposits. At the same time the requirement of cash collateral (mandatory savings) for borrowers was increased. Even though this makes financial sense it further erodes FINA TRUST s competitive position in the market. Additionally, it could increase provision 11

12 expenses if it prompts the best clients to seek loans elsewhere. Indeed, in 2015 the Portfolio at Risk increased and the provisions expenses were not enough to meet the requirements from the Central Bank of Nigeria. In that context, FINA TRUST achieved a Return of Equity of 13%, which would have turned into a negative 4.5% if the numbers had been adjusted for inflation and provision expenses (See Financial Adjustments). The net margin 7 is tight in comparison with the market. FINA TRUST has the challenge to reduce expenses while not allowing Portfolio Yield to erode further in order to ensure profitability. The net income is the first source to increase the equity. The second source is the paid in capital from shareholders. As of December the ratio Debt/equity (4.2%) is acceptable, and it has been improving due to an increase of paid in capital in 2013, net income and the reduction of savings in The shareholders are willing to further increase paid in capital during the next years until Dec-15, 64% of the deposits are concentrated in the top 20 savers. The number of savers increased importantly due to the mandatory savings for group lending. However, the savings account balance was reduced possible due to withdrawals to offset some delinquent loans. The Financial Expenses shown good trend in The bank is interested in borrowing abroad to diversify its funding sources Liquidity is overseen by a special management committee. In December 2015, liquidity was equivalent to 32% of the loan portfolio and 33% of total deposits. No contingency lines of credit exist. Terms of assets and liabilities are matched, since assets and liabilities are contracted with an average of 3 months. Assets and liabilities are in local currency and carry fixed interest rates as well. This results in very low market risk. FINA TRUST did borrow funds from institutions until March 2016, when the Central Bank of Nigeria made a loan of US$ 250,000. It is a good start. However, even though the regulator charges low annual interest rates (2%) it requires the MFI to cap lending rates for these funds at 9%. Profitability margin of only 7% falls far short of what the bank needs to cover expenses. Graph 2: Composition of Funding 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 84.8% 83.9% 85.9% 84.6% 80.9% 16.1% 14.1% 15.2% 15.4% 19.1% Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Equity Savings Since its inception, FINA TRUST had success taking deposits to finance its operations. Now, deposits are the main source of funds. Most of the deposits are for a fixed term (70% of total deposits). In 2015, this was reduced, possibly due to the lower interest rates offered. Additionally, withdrawals from big savers could affect the balance importantly. As of 7 Portfolio Yield minus expenses of the loan business (operating, financial and provisions). 12

13 Balance Sheet (US$000) Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Assets 3,201 4,311 6,115 6,611 5,804 Cash and Banks 456 1,217 1,840 2,739 1,228 Temporary Investments Net Loans 2,265 2,635 3,486 3,038 3,823 Gross Loans 2,385 2,774 3,745 3,261 4,037 Performing Loans 2,385 2,774 3,745 3,054 3,733 Portfolio at Risk Loan Loss Reserve Interest Receivables Other Current Assets Long Term Investments Property and Equipment Other Long Term Assets Liabilities 2,737 3,787 5,301 5,692 4,893 Demand Deposits ,409 1,397 1,134 Short Term Time Deposits 2,123 2,198 3,139 3,665 2,730 Short Term Funding Liabilities Other Short Term Liabilities ,029 Long Term Time Deposits Long Term Funding Liabilities Quasi-Capital Accounts Other Long Term Liabilities Equity Capital Earnings (Losses) Period Retained Earnings (63) Other Capital Accounts (111) (42) Total Liabilities & Equity 3,201 4,311 6,115 6,611 5,804 Source of Financial Statements Audited FFSS Audited FFSS Audited FFSS Audited FFSS Audited FFSS 13

14 Income Statement (US$000) For periods between: Jan-11 - Jan-12 - Jan-13 - Jan-14 - Jan-15 - Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Interest and Fee Income 1,173 1,432 1,762 1,698 1,733 Cash Interest and Fee Income 1,149 1,200 1,547 1,356 1,441 Accruals (Int.. Receivables) Interest and Fee Expense Net Interest Income 940 1,162 1,366 1,221 1,304 Provision for Loan Loss Net Interest Income After Provisions 875 1,144 1,245 1,115 1,283 Operating Expense 754 1,055 1,078 1,033 1,172 Personnel Other Administrative Expense Net Operating Income Other Income Investment Profits (Losses) Other Non-Extraordinary Income Other Expenses MFI's Inflation Adjustment (if any) Other Non-Extraordinary Expenses Net Income Before Extraordinary Items Extraordinary Items Extraordinary Income Extraordinary Expense Net Income Before Taxes Taxes Net Income Source of Financial Statements Audited FFSS Audited FFSS Audited FFSS Audited FFSS Audited FFSS 14

15 FINANCIAL ADJUSTMENTS Financial Statements are submitted according to a common format, but are not adjusted to account for different accounting policies or subsidies. To allow a comparison between microfinance institutions, the tables below show performance indicators based on adjusted financial statements. The adjustments are concentrated in the following areas: inflation adjustments if the institution does not include them, adjustments for subsidized funds 8, and adjustments for loan provisioning and write-offs. Provisions and write-offs are recalculated based on a formula 9 generally accepted as prudent for portfolios of microfinance loans. For FINA TRUST MFB, MicroRate made adjustments equivalent to US$65,000 for inflation and US$99,000 for provisions reducing the annual net income of US$119,000 to a loss of US$ 45,000. Therefore, the ROE decreased from 13% to -4.9%. Summary Adjustments Effects on Net Income (US$000) Dec-13 Dec-14 Dec-15 Annualized Unadjusted Net Income $99 $72 $119 MR Inflation Adjustment -$40 -$53 -$65 Write Off Adjustment $0 $0 -$51 Provision Adjustment $0 $0 -$49 Cost of Funds Adjustment $0 $0 $0 Adjusted Net Income $59 $19 -$45 8 MicroRate takes the deposit rate from the IMF / International Financial Statistics as minimum market rate for loans in local currency. For liabilities in U.S. dollars, the one-year LIBOR +2% and prime rate loans are used for short- and long-term, respectively. The difference between the minimum market rate and the rate charged by the funds is applied to the average of the funds in balance and is charged as additional financing expenditure. 9 MicroRate writes off delinquent loans > 180 days and recalculates the provisions according to the following: 1-30 days 10% days 30% days 60% > 90 days 100% Refinanced 50% Refinanced with > 1 day past due 100% 15

16 Adjusted Comparison Table Average Rates of the MicroRate Sample (US$000) Período: December 2015* FINA TRUST ** MicroRate- Nigerian MFIs Loan Portfolio Gross Loan Portfolio (US$000) $4,037 $70,608 Annual Change in Gross Loan Portfolio 23.8% 48.8% Number of Loans Outstanding 5, ,644 Annual Change in Number of Loans Outstanding % 74.4% Number of Borrowers 5, ,434 Annual Change in Number of Borrowers % 31.8% Average Loan Balance (per borrower) - US$ $775 $351 Portfolio at Risk / Gross Loan Portfolio 7.5% 1.3% Write-offs / Gross Loan Portfolio 0.0% 2.1% Loan loss reserves / Portfolio at Risk 70.3% 156.8% Loan loss provision expense / Average Gross Portfolio 0.6% 1.6% Efficiency and Productivity Total operating expense / Average Gross Portfolio 32.1% 26.5% Number borrowers per credit officer Number of borrowers per staff Portfolio yield 47.5% 47.2% Personnel Expense/Average Gross Portfolio 12.6% 15.7% Credit officers / Total personnel 53.3% 58.3% Incentive Pay as % of Base Salary 0.0% 0.0% Percent of Staff with MFI < 12 Months n/a 48.1% Total operating expense / Borrowers $422 $66 Financial Ratios Debt / Equity Equity/Assets 15.7% 21.4% Net Income / Average equity (ROE) -4.9% 39.8% Net Income / Average assets (ROA) -0.7% 7.9% Interest expense / Average Gross Portfolio 11.8% 8.3% Interest expense / Average funding liabilities 9.6% 9.6% (Cash + Temp. Investment)/ Gross Portfolio 31.9% 15.1% Operating margin 3.0% 10.8% Absolute Currency Amounts (US$000) Interest and Fee Income $1,733 $28,555 Net Income ($45) $5,975 Total Assets $5,804 $88,377 Deposits $3,864 $42,826 Funding Liabilities (excluding Deposits) $0 $12,780 Equity $911 $22,001 * It includes several MFIs as of the last period evaluated by MicroRate (from 2014 to 2016) ** Data with figures to Dec

17 ANNEX I: INSTITUTIONAL RATING GRADE DEFINITION Institutional Rating α+ α α β+ β β γ+ γ Financial Profile Rating The Institutional Rating provides an opinion on the long-term institutional sustainability and creditworthiness of a microfinance institution (MFI) through a comprehensive assessment of risks and performance.» Financial Institutions with high long term sustainability and high creditworthiness.» Excellent performance. Low or well managed short- medium term risk.» Financial institutions with good long term sustainability and good creditworthiness.» Good performance. Modest or well-managed short- medium term risk.» Financial institutions with moderate long term sustainability and moderate creditworthiness.» Fair performance. Moderate to medium-high risk.» Financial institutions with weak long term sustainability and poor creditworthiness.» Weak or poor performance. High to very high risk. Opinion about the financial strength of the institution and the ability to repay their obligations. Rating Outlook Positive Stable Negative Uncertain Expected direction of the rating grade over the 12 months following the rating The rating is expected to increase. The rating is expected to remain unchanged. The rating is not expected to remain unchanged. Due to unpredictable factors, a rating outlook cannot be determined. 17

18 ANNEX II: GLOSSARY OF MICROFINANCE TERMS AND INDICATORS Credit Operations» Gross Loan Portfolio Value of Loan Portfolio at a given time.» Average Gross Loan Portfolio (Value of Loan Portfolio at the start of a period + Value of Loan Portfolio at the end of a period) / 2» Number of Loans Outstanding Number of Loans at a given time.» Number of Borrowers Number of Borrowers at a given time (assumes that a Borrower can have more than one Loan at a time)» Average Loan Size Value of Loan Portfolio at a given time / Number of Borrowers at that time Portfolio Quality» Portfolio at Risk (Outstanding Balance on Arrears over 30 days + Total Gross Outstanding Restructured Portfolio) / Total Outstanding Gross Portfolio» Write-off Ratio Value of Loan Write-offs / Gross Loan Portfolio» Provision Expense Ratio Loan Loss Provisioning Expenses / Average Gross Portfolio» Risk Coverage Ratio Loan Loss Reserves / (Outstanding Balance on Arrears over 30 days + Refinanced Loans) Productivity» Operating Expense Ratio Total operating expense / Average gross portfolio» Cost per Borrower Operating Expenses / Average Number of Active Borrowers» Borrowers per Credit Officer Number of Active Borrowers (excluding Consumer Loans) / Number of Loan Officers» Borrowers per Staff Number of Active Borrowers (excluding Consumer Loans) /Total Staff Financial» Debt / Equity Total Liabilities / Total Equity» Return on Equity Net Income / Average Equity» Return on Assets Net Income / Average Assets» Portfolio Yield Interest and Fee Income / Average Gross Portfolio» Funding Expense Ratio Interest and Fee Expenses / Average Gross Portfolio» Cost of Funds Ratio Interest and Fee Expenses / Average Funding Liabilities» Liquidity Ratio Cash and Banks, and Temporary Investments/Gross Loan Portfolio» Deposit Coverage Ratio Cash and Banks, and Temporary Investments/Client Deposits 18

19 Copyright 2016 by MicroRate All rights reserved. The reproduction of this document either as a whole or in part without MicroRate s permission is prohibited. Ratings are opinions, based on analysis and observations. As statements of opinion they must be distinguished from statements of fact. In no case are they recommendations to purchase, sell or hold any securities. All information contained herein is obtained from sources believed to be accurate and reliable. Because of the possibility of human or mechanical error, MicroRate makes no representation or warranty as to the accuracy or completeness of any information. Under no circumstances shall MicroRate have any liability to any person or entity for any loss in whole or in part caused by or relating to any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MicroRate. The CEO and External Audit Firm(s) of the entity under review are responsible for the consistency and accuracy of the information given to MicroRate. MicroRate does not have the function of auditing the financial statements of the entity.